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Starwood Hotels & Resorts Worldwide (NYSE:HOT)

Q4 2010 Earnings Call

February 03, 2011 10:30 am ET

Executives

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

Jason Koval - Vice President of Investor Relation

Analysts

Shaun Kelley - BofA Merrill Lynch

Smedes Rose - Keefe, Bruyette, & Woods, Inc.

Janet Brashear - Bernstein Research

Chris Woronka - Deutsche Bank AG

Joseph Greff - JP Morgan Chase & Co

Joshua Attie - Citigroup Inc

Harry Curtis - Nomura Securities Co. Ltd.

Steven Kent - Goldman Sachs Group Inc.

Robin Farley - UBS Investment Bank

Ryan Meliker - Morgan Stanley

William Marks - JMP Securities LLC

Sule Laypan - Barclays Capital

Operator

Good morning. My name is Sylvia and I will be your conference operator today. At this time, I would like to welcome everyone to the Starwood Hotels & Resorts Fourth Quarter 2010 Earnings Release Conference Call. [Operator Instructions] I would now turn the call over to Mr. Jason Koval, VP of Investor Relations. Sir, you may begin your call.

Jason Koval

Thank you, Sylvia and thanks to all of you for dialing in to Starwood's fourth quarter 2010 earnings call. Joining me today are Frits van Paasschen, our CEO; and Vasant Prabhu, our Vice Chairman and CFO.

We will be making statements on this call related company plans, prospects and expectations that constitute forward-looking statements under the Safe Harbor provision of the Securities Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as Starwood or its management believes, expects, anticipates, foresees, forecasts, estimates or other words or phrases of similar import. All such statements are based on our expectations as of today and should not be relied upon as representing our expectations as of any subsequent date. Actual results might differ from our discussion today. I point you to our 10-K and other SEC filings available from the SEC or through our offices here and on our website at starwoodhotels.com for some of the factors that could cause results to differ.

With that, I'm pleased to turn the call over to Frits for his comments. Frits?

Frits van Paasschen

Thank you, Jay, and thanks, all, for joining us on our call over today. I'm happy to report that 2010 turned out to be a much better year than anyone predicted 12 months ago. And fortunately, the momentum has continued into 2011. Our results suggest that the lodging recovery has held steady in the face of an uncertain and volatile world.

REVPAR growth sustained its 10% cliff, even as comparisons became more challenging throughout the year. We enjoyed a tailwind as Luxury brands and gateway cities powered ahead. Based on these results, we remain cautiously confident about the near term. Nevertheless, the rapidly unfolding events in Egypt remind us that the world is an uncertain place. Our thoughts today are with the people of Egypt, including our guests and associates.

As we look ahead, we remain bullish about our long-term prospects. Many refer to 2011 as the beginning of a two-speed recovery. According to that line of thinking, the developed world will see moderate economic growth. In North America and Europe, the hotel industry may nonetheless be on the verge of a multiyear surge in rates, thanks to the basic laws of supply and demand. This is worth some explanation.

Unlike residential or office real estate, hotel supply is unusually tight at this early stage in the cycle. And with construction financing almost nonexistent, virtually no new hotels are being built. Meanwhile, demand is already strong and likely to get stronger. Corporate profitability is high, and businesses are out traveling in search of growth. Leisure demand is also building, as wealthier households are in good financial shape. So based on tight supply and growing demand, we believe REVPAR has a good chance of rising from well below its historic trend line, where it is today, to well above the trend line in the coming years. In fact, the next three to four years could see the strongest real growth in rates in North America that we've seen in decades.

The second part of the two-speed recovery is playing out in the emerging markets. We've talked at length about his huge secular growth trend in earlier calls. And today, we remain as bullish as ever in these markets as an extraordinary growth opportunity for Starwood. Rising wealth and growing demand for infrastructure, travel, and of course, hotels, has a long way to go up.

For the next few minutes, I'd like to cover three topics: First, a quick review of the fourth quarter; second, an in-depth look at our approach to global brands; and third, an update on our 2011 outlook.

Let's start with our fourth quarter results. Worldwide REVPAR was up over 10%, excluding foreign exchange, well ahead of our Q3 guidance. Growth was balanced around most of the world. Outside North America, REVPAR growth was 11% compared to 10% in North America. Likewise, owned hotels around the world grew at 11%. Margins increased 170 basis points after adjusting for nonrecurring items in 2009.

We continue to work hard to drive our hotels past the levels of peak profitability that they had reached before the downturn. This is what we're calling our path-to-peak initiatives, and they're focused on taking market share while holding our costs down. Today, margins are still low. But as REVPAR builds, they'll continue moving in the right direction.

Our Vacation Ownership business also beat expectations. Rising consumer confidence is reflected in rising tour flows and close rates. Defaults in delinquencies are also improving. Remember, this business generated almost $0.5 billion in cash over the past two years. We expect it to throw out more cash in the coming years as well. Also, by this time next year, Bal Harbour will begin closing sales and returning cash.

So to conclude our discussion of the fourth quarter, we beat the high end of our EBITDA guidance by $34 million and EPS by $0.14. This is a great way to finish the year and put a foundation under what looks to be a prolonged lodging recovery.

So let's turn now to my second topic. I'd like to spend most of this call talking about our philosophy and approach to creating global lifestyle brands. Over the past several calls, we've talked at length about our global advantage. The fact that we parlayed our decades-long legacy in cities around the world into being the most global hotel company, with meaningful leads in China, India, the Middle East, Africa, and Latin America. With 70% of the world's economic growth expected to come from emerging markets, I have a strong conviction that this is an important advantage for Starwood.

Equally important is our focus on building brands that will capture the loyalty and increasingly brand-savvy global travelers. Brands and innovation are what makes Starwood special in the eyes of associates, our guests and our owners. Throughout its history, Starwood earned its stripes as a lodging industry renegade with game-changing innovations like W to Heavenly Bed and Starwood Preferred Guest. Over the past several years, we've worked hard to forge a more aligned and disciplined culture. But even though we've grown up, we can still shake it up. We're right where we want to be with the right balance of Yin and Yang, intuitive branding and disciplined execution.

Before I joined Starwood, I often traveled more than 100 days per year staying in my share of nice hotels. But as a brand guy, I would describe so many of those hotels as generic or even soulless. The only way you could tell one brand from another was to walk outside and look at the sign on the building. A four- or five-star hotel was a four- or five-star hotel. At Starwood, we believe branding should be much more than that. Here's an example: last week, I was in San Diego for the ALIS Conference. I left the US GRANT, our Luxury Collection hotel, walked through the Westin on my way to reception at the W. These are all wonderful hotels, but what jumps out is how each is distinct from the other. Each hotel represents its brand, whether it's the 100 years of heritage at the beautifully restored US GRANT, the party vibe at the W's rooftop beach bar with a soothing Zen-like lobby at The Westin Gaslamp, you can't escape that each of these hotels makes you feel different. That, in a nutshell, is what we mean by lifestyle branding.

We aren't segmenting by price or stars, and we foresee that the appeal of lifestyle brands will only increase in a world where travelers expect ever more from brands.

During our Investor Day, we discussed how the world is changing rapidly in a ways that favor a global brand-led company like Starwood. Globalization, and all that comes with it, including billions of new travelers and generations connected via social networks, translates into a truly global consumer base with unprecedented appetite for global brands.

I see this as the next stage in the long evolution of brands. When many of us baby boomers grew up in the 60s or 70s, brands were just a promise, a guarantee of safety, consistency and reliability. Ultimately, brands got so good at delivering consistency that consumers took it for granted and got bored. Brands today can't just be reliable or even just generically nice. They need to deliver personality, purpose and personalization.

Consumers look to brands to add something to their lives and to define who they are. So we work hard to understand our brand loyalists and use these insights to define each brand; W for trendsetters, Sheraton for socials, Westin for balance-seekers, Le Méridien for creatives, Aloft for early adopters and so on. Distinct brands help us create emotional connections with our guests. Distinct brands also help us work with owners to align the right brand with the right project and to translate crisp brand positioning into more value for their assets. Our business model boils down to owning the hearts and minds of our guests and creating value for our owners.

The well spring of Starwood's lifestyle brand strategy dates back to the launch of W in 1998. More recently, we've kept the flame of innovation burning brightly with the launch of Aloft and Element. Innovation is also bright in Sheraton. The Link@Sheraton, our lobby cybercafe for today's multi-tasking social traveler, is now a central feature of almost every Sheraton around the world. An essential part of lifestyle branding is translating brand personality into design. In fact, I believe that bringing our brands to life in 3D is one of Starwood's greatest innovations.

Design is a sweet spot for us and something we take seriously. So despite the crisis and our focus on reducing costs, we made the investment to open the Starwood Design Center in Soho early last year. Our design team there and in our headquarters is comprised of leaders that have come to us from the world's most respected design-led brands including Armani, Nike and Starbucks.

But insights and personality, design and innovation are nothing without the human touch. Our brands depend on the efforts of our associates to delight our guests. So we start by selecting the right associates to represent our brands. We train them in the fundamentals of service delivered in the right brand voice, and we work hard to remind our associates that they're central to the success of the company, which, in fact, they are.

The sum total of all that we do creates branded experiences; cues, both overt and subtle, reinforce what each brand is about. The goal is to appeal to our guests' lifestyle, emotions and aspirations, and to compel them to come back again and again.

I can't talk about brand building, innovation or design without talking more about W. W came on the scene, or better said, created a scene in New York back in 1998. For the first time, a hotel combined the style of an independent boutique hotel with the substance of a branded business hotel. The first W was an immediate hit. With lines around the block, our biggest problem was replacing the floors for the wear and tear. The original idea of W was to transform tired, upscale properties in to cool Ws and charged upper upscale rates, but as we've grown around the world with W flagships in Hong Kong, Barcelona, Santiago and South Beach, the brand has been pulled up-market, with rates that put us squarely into Luxury territory, and the growth continues. We believe that W will get to 50 hotels in half the time that it took Four Seasons. This is what can happen when you combine a game-changing brand with a powerful global platform.

We haven't stopped there. The way W redefined Luxury spawned the belief that we could do the same to shake up this state's Select Service segment. The Aloft brand has done just that. Last month, TripAdvisor released survey results ranking two of our Aloft hotels in the top 10 trendiest hotels in the entire U.S. This list concluded some of the most buzzed-about new hotels.

So it's one thing for a Manhattan hotspot to make a list like this, but a select-service hotel like Aloft in suburban Nashville, or an airport hotel like the Aloft in Portland, Oregon? But this is exactly what we set out to do when we created Aloft, to bring style and design at an affordable price to unexpected places, or as we like to say, style at a steal. Aloft was created by and for next-generation travelers, people who grew up with IKEA and iPods, expecting style and design wherever they go.

And here is something else that's groundbreaking about Aloft. We launched it globally from day one in Canada, China, India, the Emirates and Belgium. Globalization means that there's simultaneous demand for new brands. Segmentation by geography is as outdated as segmentation by price. This helps explain why Aloft has the fastest brand launch in hotel history. In a few months, we'll celebrate our 50th opening, not bad for a brand that opened its doors during the worst recession in our lifetimes.

As you may also know, we recently launched another first-of-its-kind brand: Element, the world's first LEED-certified hotel chain. We dubbed it our "eco-chic brand." It combines sustainability and style and already enjoys a cult-like following. Guest satisfaction scores for Element properties routinely reach levels normally associated with Luxury hotels. And despite its small footprint, REVPAR index is ramping quickly. With Gen Y leading the charge in how we think about sustainability, we're looking to migrate the learnings from Element, which we consider our green innovation lab, across our entire portfolio of brands. The brand may be small now, but its impact on the industry over the coming decade should be quite meaningful. In fact, Element helped Starwood earn a coveted spot as one of Newsweek's greenest companies.

Let's move on to the brand that helped inspire Element, Westin. Westin is proof-positive that a district brand personality in a mainstream upper upscale space can create a category killer. Building on the success of the iconic Heavenly Bed, Westin is all about wellness and renewal. The cachet of the Westin brand and its suite of restorative products like the Heavenly Bath, the Heavenly Spa and a SuperFoods menu allow it to own wellness among hotel brands.

And wellness is by no means a passing fad. It's a $2 trillion global industry, driven by affluent consumers around the globe. In fact, Westin is enjoying global growth with more than 90% of its pipeline outside of the U.S. In the past two years, we've opened eight Westins in China and India alone, and Westin opened strong right out of the gate with markets like Tian Jin, China and Hyderabad, India, outperforming the comp set in the first year. Back in the U.S., with a footprint half the size of other upper upscale brands, there's plenty of room to grow in North America once developers start building.

Another brand case study is Le Méridien, with its European heritage and geographic reach, it complemented nicely our existing brands and footprint. When we bought the brand five years ago, it wasn't making money. We eliminated 85% of the G&A. And by plugging it into our system, we grew revenues by 20% in the first year alone. The net result was first-year EBITDA of nearly $50 million, not bad for a $300 million investment.

This acquisition showed how we can breathe life into a languishing brand. We took a disparate group of hotels, many of which were at best generically nice, and invented a brand for the creative class, a group not served by any global hotel brand. The creative class includes the growing ranks of architects, web designers and journalists and is estimated to number nearly in the tens of millions in the U.S. alone. Le Méridien brought art, music and culture and a European sensibility into the guest experience. We selectively added high-quality hotels to the portfolio and removed 30 properties that weren't up to the brand standards. Today, worldwide REVPAR index is at record highs and catching the interest of developers.

So now I'd like to turn to the Sheraton brand, our biggest brand and our biggest story. From my career in branded businesses, I can tell you that it takes discipline and determination to bring today's sense of personality to a brand that grew up in the era of reliability, but we held the course over the past four years to recreate Sheraton. This entailed a $6 billion capital plan combined with de-flagging over 50 properties worldwide.

Behind the discipline of our Sheraton efforts, there was a vision for creating a compelling lifestyle brand out of this global hospitality icon. Sheraton has the highest global awareness of any hotel brand and was the first global brand in most markets around the world. In short, Sheraton is the world's gathering place. This positioning appeals to today's social travelers and is a lifestyle brand transcends generations and geographies. Sheraton appeals to what we call "downstairs people." They love to travel but don't want to sit alone in their rooms. That insight led us to redesign our Sheraton lobbies with the Link, an inviting space that gives new purpose to our lobbies in much the same way the living room does at W. Most importantly, I'm thrilled to share with you the success of our Sheraton relaunch. The brand has seen record-high guest satisfaction, record-high meeting planners' likelihood to return, record-high associate engagement for three years running. Sheraton today also boasts record-high four-star ratings and a higher percentage of those ratings than either Hilton or Marriott.

In 2010, this translated into a 210-basis-point gain in REVPAR index in North America. This is a monumental move for an established brand base of 200 hotels. Finally, it shouldn't be a surprise that Sheraton is also the largest part of our global pipeline.

We've also revitalized Four Points by Sheraton, which today has seen record growth. The halo effect of Sheraton is certainly helping Four Points around the world. Four Points' personality is based on the insight that many travelers are looking for honest, uncomplicated comfort in the form of a great bed, cold beer, free water and Wi-Fi. In today's environment in North America, Four Points by Sheraton is a great conversion play for owners looking to get more value out of their assets. Oh, and by the way, uncomplicated doesn't mean we can't have a sense of humor. Over the past few years, our Chief Beer Officer made appearances across our system.

And finally, let's turn to our St. Regis and Luxury Collection brands. Between the two, we have 100 Luxury properties around the world, almost 140 when you add in W's portfolio. That gives us substantially more luxury hotels than any other hotel company. Like W, our Luxury brands benefit from their connection to the Starwood platform. Take for instance our loyalty program, SPG. Because of our high-end brands, we're able to offer our members more luxury and more destinations around the globe. This is a big draw for our loyal members who account for nearly one in two guests at our hotels today.

And as we all know, wealth creation around the world is fueling new demand for Luxury. In fact, 70% of our pipeline for St. Regis and Luxury Collection is in emerging markets across Asia, Latin America and the Middle East. Looking back, this is exactly the opportunity that led us to create the St. Regis brand out of one single-owned hotel, the St. Regis New York. This legendary hotel defines luxury with its signature butler service. And whereas W may thumb its nose at tradition, St. Regis respects it, but is not afraid to reinterpret it.

In just the past two years, St. Regis has doubled its footprint, and there's plenty of runway for future growth, as St. Regis Hotels debut in locations such as Lhasa in Tibet, Sanya in Southern China, Bahia Beach in Puerto Rico and Doha in Qatar. Places that, not long ago, you might not have associated as luxury destinations.

And finally, a few words about Luxury Collection. These high-end hotels offer indigenous experiences to sophisticated travelers exploring the world for something new. Luxury Collection offers owners of independent iconic properties the chance to plug into a global reservation system, a sales force and, of course, SPG. The brand's conversion flexibility, not to mention its unique appeal, is reflected by the recent openings at the Liberty Hotel in Boston, a transformed urban jail; the Omaha Resort in the Emirates, a luxury tented camp in the desert; and The Astor Hotel in Tianjin, the oldest luxury hotel in China.

So my goal over of the past few minutes has been to share with you some insight into our strategy behind our brands. To sum it up, Starwood's approach offers our guests and our owners a portfolio of brands, each with a personality built on consumer insight and brought to life by design, innovation and energized associates. A brand that is reliable and all things to all people is yesterday's news. A portfolio of distinct brands for distinct travel occasions is a great foundation for tomorrow's growth. Through this commitment to differentiated lifestyle brands, we are looking to lead in delivering great experiences in an earning-premium rates.

So before I wrap up, let me move on to my third topic for today, a revised outlook for 2011. Business travel remains strong. Our Monday to Thursday volumes are driving occupancies in the 90% range in most major metro markets. Our customers are telling us that they'll continue to travel in 2011 in search of precious growth for their own businesses.

Some months ago, I described this as a travel-intensive recovery. I still believe that. Group business has also carried over the momentum we built in 2010. As a reminder, 2010 Group business at the beginning of last year was pacing down 20%, but improved dramatically through 2010. Group pays for 2011 also improved sequentially through 2010. So as a result, we're beginning 2011 with pace of double digits significantly ahead of last year's starting point.

As expected for some time, booking windows are now slowly starting to lengthen. Nonetheless, strong bookings and improving sales will translate into revenues that are quickly rebounding towards 2007 levels. Who would have taken that bet a year ago? And get this, December crushed the all-time record for monthly group production. The real story in 2011 will be about rising rates. Corporate rate negotiations are being finalized, and they're still on track to increase in high-single digits.

The mix of room categories and clients should also support our ADR growth. Business travelers power 75% of our revenues, but leisure travel is also an important part of our business, especially at resorts and tourist destinations. We've seen the leisure demand increase as consumer confidence has improved and, we take heart from the fact that affluent travelers with finances today are quite robust compared to a couple of years ago. As with business travel, this affords us the opportunity to improve mix by, for example, phasing out some cut-rate Internet channels such as opaque [ph].

So before I hand off to Vasant, I'd like to share a few more thoughts on 2011. Overall, I'm encouraged by our REVPAR trajectory in what appears to be the start of a multiyear recovery. For all the reasons we've been talking about, we remain bullish about our business over the long term. At the same time, we see a global economy that can be volatile and unpredictable. If current trends continue, we could expect to deliver worldwide REVPAR growth of 7% to 9% in 2011. With rate increases for group and corporate accounts and a better mix of business, REVPAR in 2011 will be increasingly driven by rate. This is in contrast to 2010, where REVPAR growth was driven by rising occupancy. Factoring all this in, we would deliver a baseline 2011 EBITDA in the range of $975 million to $1 billion.

With more on that, let me turn over the call to Vasant.

Vasant Prabhu

Thank you, Frits, and good morning, everyone. As you have seen, business momentum remains strong globally through the fourth quarter. REVPAR growth exceeded our expectations with double-digit growth in local currencies, both in the U.S. and internationally. Healthy fee growth, a strong finish at SVO and good cost control resulted in EBITDA and EPS well ahead of our expectations. This sets the stage well for what we think will be the second year of a normal, cyclical recovery in 2011. Over the next few minutes, I'll provide some color on business conditions around the world, our 2011 outlook, our balance sheet and Bal Harbour.

Despite tougher comparisons from 2009, North America was up double digits in the fourth quarter. We saw rate picking up and group business coming back strong. In the first half, the East, New York, Boston and other cities led the recovery. But as the year progressed, business picked up in the West, San Francisco, Seattle and across the country. At this time last year, we had indicated that late-breaking corporate transient business would make or break 2010. And as you know, corporate transient business came back strong, while make-or-break 2011 is red and the trends we saw in Q4 are promising. In 2010, occupancy accounted for almost all the REVPAR growth in North America. We expect rate to drive 50% or more of REVPAR growth in 2011.

With 75% of corporate rate negotiations complete, we expect to finish with rates up in the high single digits. We will also continue to aggressively manage mix to improve rate realization through the year. Group business is also picking up, as we would expect, at this stage in the cycle. Group base is up in the double digits. Q4 new production was up over 50% for all future years and up almost 50% for 2011. The lead pipeline remains strong, with lead volume up almost 30% and size of leads up 20%. With some volatility due to the weather, January momentum is good, with REVPAR tracking in the double digits across the U.S. Low supply growth and the U.S. economy showing increasing signs of recovery point to 2011 shaping up as a second year of a normal cyclical recovery.

Outside the U.S., Asia continues to power ahead. Q4 REVPAR growth was up in the high teens across Asia, led by China and China-related economies. We expect sums will be expected some slowdown after the World Expo in Shanghai, but did not see any as China grew 24%. China-related economies like Australia are also booming. Our hotels in Australia are hitting all-time highs in profitability, even as the Aussie dollar is at parity with the U.S. dollar. Indonesia, South Korea, Vietnam, also a double-digit growth. Thailand is recovering from the political turmoil, and Japan remains the only soft spot.

Fee growth in Asia in 2010 approached 40%, driven by 26% REVPAR growth and the rapid expansion of our hotel base in the region. Starwood-branded rooms operating in Asia are up over 80% since 2005. And as you know, we have a strong pipeline of future openings.

Moving to Europe, trends are not dissimilar to the U.S. in Northern and Central Europe. Local currency REVPARs were up double digits with some volatility due to the unusual snow in December. Group base is also picking up and booking windows are returning to normal. Despite the concerns about Spain, our business was fine in Q4 with outstanding performance all year by our new iconic W Barcelona, which we lease. The W is well on its way to becoming the leading hotel in Barcelona.

We are excited about the next major W opening in Europe, the W Leicester Square in London this February, which is also a leased hotel. Pre-opening costs associated with this opening will depress reported on-lease hotel earnings in Q1. Q1 is a seasonally small quarter in Europe, and the trend for the year will likely become more evident, as we get into the second quarter. Like the U.S. with low supply growth and rate improvement, we expect 2011 to shape up as the second year of a normal cyclical recovery. As we have for the past few years, we have hedged about 50% of our euro exposure.

The Middle East and Africa is the only region that has not yet recovered fully. REVPAR was down slightly in Q4. Africa grew but the Middle East was down, mostly due to the Gulf where we have a large presence. But we did see a recovery in the Gulf in November, December, and this appears to be continuing into January. Occupancies in the Gulf are high, but rates have lagged so far.

The political turmoil in North Africa, especially Egypt, is of course hurting our business. We have 16 hotels across North Africa and approximately $10 million to $12 million in fees in 2010. We expect that our fees will be hit in North Africa, but we may pick up some business if it shifts to the Gulf, for example. It is too early to tell how we will be impacted, but this is clearly a risk that needs to be closely monitored.

In Latin America, the South continues to boom. Brazil was up 18%; Argentina, up 15%; and Chile, up 25% as it recovers from last year's earthquake. In Mexico, Mexico City was strong. The results continue to lag due to crime concerns but is starting to see some improvement. The issue persisting in Latin America is the local inflation devaluation gap, which is hurting margins at our hotels. We have large owned hotels in the region, and this issue will depress our global owned hotel margins in 2011, as it has in 2010. Local costs are going up: 25%, for example, in Argentina, due to high local inflation. But the currency into the weakening relative dollar has been roughly flat over the last three months.

Our hotel rates, which are typically in dollars, are not going up as fast as our costs. As a result of this disconnect, and despite significant efforts by our local teams to hold costs in line, our margins are under pressure. We expect this issue to persist as long as these currencies are not devalued relative to the dollar commensurate with the local inflation trend.

Our Vacation Ownership business is stable. Tours, closed rates and pricing have tracked in line with expectations. Delinquency default rates continue to improve. We remain focused on cash generation in this business, with selective inventory adds. We expect to generate over $150 million in cash flow in 2011 on top of the $500 million we generated in '09 and '10.

At Bal Harbour, 2011 is a key year. The project is nearing completion. We're targeting a temporary certificate of occupancy in Q4 2011 and expect to start closing late in the fourth quarter. Capital required is $150 million in 2011. We will have expenses through the first three quarters for Bal Harbour, as we have had in prior years. Assuming we start closings in Q4, there may well be some revenue and income recognition in Q4, which is not included in our outlook. We will provide updates as the year progresses. There will also be some cash flow from closings that offset some of our capital spend on Bal Harbour this year.

We have contracts on more than half the condo inventory and hope to be 65% to 70% sold by the time we start closings. 2012 will be the big year for revenue and income recognition, and cash flow from Bal Harbour based on current plans.

All this brings us to our overall outlook for 2011. The world remains an uncertain place with the risk of geopolitical and marcoeconomic shocks. We remain of the view that the scenario-based approach is the best way to plan for the future, we have prepared for worst-case outcomes, but based on what we see today, believe that a normal recovery scenario is playing out around the world. Our outlook reflects this normal recovery with global REVPAR growth of 7% to 9% at company-operated hotels in local currency and 100 basis points higher as reported in dollars. 150 to 200 basis points of margin improvement at owned hotels; 10% to 12% fee growth, a small increase at SVO, giving us a 2011 EBITDA range of $975 million to $1 billion and an EPS range of $1.55 to $1.65.

One point of REVPAR impacts EBITDA by approximately $15 million. One point of shift in Forex rates globally relative to the dollar impacts EBITDA by $4 million to $5 million. We expect to open 70 to 80 hotels globally in 2011, with more than half outside the U.S. Why our own margin improvements not higher? Three points to highlight here: margin pressure at our owned Latin American hotels due to the inflation devaluation, disconnect; second, at this stage of the cycle, revenue, which is what drives margins, lag REVPAR by almost 400 basis points in Q4, for example; and preopening costs associated with the W in London, which will reduce Q1-owned profits. We will remain very focused on cost, as we have been, to drive our own margins back to peak levels.

We are setting up capital spending up to two years, when we sharply reduced our capital to conserve cash. As you may expect, there is some catching up to do over the next couple of years. Several significant renovations will be undertaken in 2011, including the Grand in Florence, which we are converting into a St. Regis, the Alfonso XIII in Seville, the Westin Gaslamp, the Sheraton Kauai and other smaller projects.

Over an extended time frame, our maintenance capital spend at owned hotels has averaged 7% to 8% of gross operating revenue, ranging from 5% when the cycle turns down to highs of 10% when the cycle turns up. We expect to be at the high end of the range for the next couple of years.

We're also stepping up spending on our major technology platforms to enhance functionality, to build a new platform in sales and to refresh hardware. In addition, as we normally do, we expect to deploy capital to build our pipeline and assist owners with key money, loans or equity when the returns warrant it. Despite the increase in capital spending, we expect to be modestly positive on cash flow before any asset sales. All the time, as we continue to sell hotels, the capital needs of the business will decline.

Moving onto the balance sheet. We have significant cash inflows in the fourth quarter, $245 million from the tax refund, $75 million from a legal settlement, cash from the sale of a joint venture hotel and, of course, strong operating performance. As a result, our net debt, excluding securitized receivables, was down to $2 billion. At the end of the year we had cash in excess of working capital needs of approximately $650 million.

Our liquidity and leverage positions continue to get stronger. Our ratios are well below covenant levels, and we are moving rapidly towards achieving an investment-grade rating, hopefully before the end of 2011. With regard to asset sales, we continue to have a few assets on the market. As always, we will close deals where we get the right price, the right management-to-franchise contract and the right buyer, and we will announce deals if and when they close. As is our practice, our outlook does not assume any asset sales.

With that, let me turn this back to Jay.

Jason Koval

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

Question-and-Answer Session

Operator

Your first question comes from Joseph Greff from JPMorgan.

Joseph Greff - JP Morgan Chase & Co

With respect to your group pace commentary, I was hoping you could break that out between the volume and pricing. And then, if I can quickly ask another second question here, you touched upon inflationary pressures in the emerging markets, when you're looking at Asia Pac or Brazil or Latin America, do you think you could drive the ADR higher above wherever the rest of these cost inflationary pressures are?

Vasant Prabhu

On group pace, at this point, it's driven, as you would expect, because of the business that was booked in 2010 more by volume than rate. But as the new business is coming in, the mix is changing more to rate. So clearly, that's moving in the right direction, and we are getting the ability to move rates up in the Group business. As it relates to pricing with inflation, we definitely have some challenges in Latin America, because there's been a history there of setting rates in dollars. And that definitely is not making it easy to move rates up, given the local competitive situation and the fairly significant difference between inflation and devaluation. Less of an issue in other markets. And Frits, you're going to add something.

Frits van Paasschen

I think in many respects, the growing inflation in some other emerging markets, while nowhere near the issue it is in Latin America, speaks to the strength and the growth in those economies. So we continue to look for ways to pull up rates. I think that the REVPAR performance in Asia Pacific certainly points to our ability to do that. And likewise, as the markets in Africa and the Middle East rebound, which we expect that they will this year, particularly with rising commodity prices, that we should be able to push rate there as well. So I think by and large, rates should do well in emerging markets, and the specific phenomenon in Latin America, I think, was pretty well-outlined by Vasant already.

Jason Koval

Joe, I think it's also worth adding that as you look at group pace in 2012, that's also pacing positive relative to 2011, which, as Vasant mentioned, is up double digits.

Operator

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

Janet Brashear - Bernstein Research

My question is on incentive fees, but I'm wondering, also, if you could follow up on your previous remarks and talk about where else in the world besides Latin America you set rates in U.S. dollars? And then the question on incentive fees is, you had nice year-over-year in sequential growth in the quarter, could you talk about what percent of your U.S. hotels are in the money now and how you expect that to change for 2011?

Vasant Prabhu

On the U.S. incentive fees, as we've said, I mean for us, uniquely perhaps, U.S. incentive fees are not a large number because of the newness of some of our management contracts. We are still at a relatively low number in terms of the hotels that are in incentive fee territory. That number will climb over time, but the overall size of the incentive fee base is not large as we have talked about before. As it relates to incentive fees outside the U.S., clearly the management contract structure is linked to first-dollar incentives and those track profits quite well, which is why we've seen such healthy growth in Asia. The only part of the world where incentive fees have not been growing is in the Middle East and Africa, because REVPAR there hasn't grown.

Jason Koval

And your other question was on pricing in dollars, and Latin American is the only region where we price in dollars, Janet.

Operator

Your next question comes from Ryan Meliker with Morgan Stanley.

Ryan Meliker - Morgan Stanley

Just a quick follow up on those incentive fees. If you can give me some color, I'm not sure if there were true-ups in the quarter with regards to the rest the year, but it looks like incentive fees were up almost 40% on a 4Q '10 over 4Q '09 basis, and almost 35% on a per-room basis, has there been true-ups or with 9% REVPAR growth and more of that growth coming in the form of rate in 2011? Can we expect to see similar-type incentive fee growth going forward?

Vasant Prabhu

Every quarter there is always a little bit of noise here and there. I mean sometimes, you have some fees that are in a cash basis and the fee is paid. But by large, the incentive fee growth in the fourth quarter was powered by Asia, where you saw some significant REVPAR growth. It was good in the U.S. from a very low base. And what held it back to some degree was the Middle East. So I think we'll see some of that in the next year, but every quarter, there's a few things that will move the numbers up and down. You should look at the full year number to get more of a run-rate kind of look at it.

Frits van Paasschen

I think to bear in mind with the incentive fees is, as we talked a number of quarters ago, we've been through a process of working through lean operations, property by property. And that included both our owned hotels but also, importantly, the hotels that we manage on behalf of our owners. And so, as REVPAR is grown, and we've been able to hold costs down, that certainly, I think, put us in a good position for incentive fees to continue to build. Are we expecting that we'll continue at a 40% cliff? We'd love to say that. On the other hand, there are points where you get to thresholds, and incentive fee growth can bounce around a little bit quarter-to-quarter. So as Vasant said, look at the full year and that should probably give you a better sense of the overall trend.

Operator

Your next question comes from Felicia Hendrix from Barclays Capital.

Sule Laypan - Barclays Capital

This is actually Sule Laypan for Felicia. You mentioned you're stepping up your IT spending with a little effect SG&A this year, and I'm just wondering if that's the main driver for the increase in your SG&A guidance or are there other things, in other words, is your baseline SG&A mainly staying flat or should we expect that to increase this year?

Vasant Prabhu

Yes, we've got 2% to 3% increase. One of the things, we're holding the line on SG&A just about everywhere except in high-growth markets. So there will, in fact, be continued investments in SG&A to build our capabilities in all parts of Asia, with a particular focus on China and India, certainly, in the Middle East and Africa and places like Brazil. So that is part of it. The IT spend, not all of it, there is only a piece of it that will hit SG&A, because a lot of the IT spend is what we do on behalf of our old system. So that wouldn't be a large part of the SG&A cost.

Frits van Paasschen

I might just add a couple of things to that as well. First, on the headcount side with respect overhead, we are continuing a philosophy and approach of flat headcount with the exception of areas where we see a great opportunity for growth. So, for example today with 70 hotels roughly open in China and another 80 on the way, we absolutely want to make sure that we are fully staffed and on stream to bring those next 80 hotels on and opening as we say hot, meaning successful and on budget. So we'll continue to focus of flat headcount, with the exception, as Vasant referred to, of investing in those areas where we see considerable growth. And then on the IT spend side, from our perspective, investing in our information and our technology capabilities is central to our strategy of being in a fee-driven business and being able to create value for our owners and being able to plug our owners into a system with increasing capabilities, we believe, points to an area where we can continue to build a lead and take advantage of the scale of our system.

Operator

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

Shaun Kelley - BofA Merrill Lynch

I just want to ask real quickly about giving us an update maybe on the real estate sales side? We've continued to see a lot of interest and opportunity in markets like New York, where you guys have a number of owned hotels. So could you give us your thoughts on maybe the levels of inquiry there, who some of those inquiries are come from? And then, Vasant, maybe just the latest on the NOL?

Frits van Paasschen

I'll hand it to Vasant in a minute to talk about the NOL, Shaun. Briefly though, on the real estate market, as we see it, clearly, the market fell off in a dramatic way in 2008 and 2009. We're delighted to see a recovery, but I would call it a partial recovery in the hotel transaction market today. And by that, I mean the real buyers today are from two places. They're from well-capitalized REITs who are looking for operating hotels, mostly in gateway cities that are well-financed and have no complication. The other buyers, such as they exist, and we would call these on a rifle-shot basis, our high net-worth buyers from different markets around the world. What you're not yet seeing is the depth in terms of the buyer base, meaning private equity funds, other investors and more high net-worth pockets of wealth in different places. And you're also not seeing the depth in terms of the kind of assets that are being traded. And so, at this point, we will continue to look for individual sales of hotels, where we feel we can get a great price. We remain committed to the asset-light strategy, but we think this market is still some time away from being a fully robust buy-and-sell market for hotels. So with that, Vasant, you want to add some color in the NOL?

Vasant Prabhu

The NOL, there's really not a whole lot new to say. We have continued to use it through 2010 better than we can on transactions, and we have plans in place to ensure that we utilize most, if not all of it, before it expires.

Operator

Your next question comes from Robin Farley from UBS Securities.

Robin Farley - UBS Investment Bank

I wonder if you could just provide any seasonality on the -- you mentioned the $10 million to $12 million in fees from North Africa. There's a little bit of seasonality by quarter, if you could just give any color on that? And then did you say what percent of properties are paying incentive fees at this point?

Vasant Prabhu

On the seasonality in North Africa, there's not a whole lot of seasonality. $3 million to $4 million a quarter is reasonably close to what you should expect. And in terms of percentage of hotels paying fees in North America, it's roughly a third. I'm sorry, I don't have a precise number with me right now.

Jason Koval

Rob, I don't have the Investor Day pack in front of me, but we went into some detail about what percentage of properties, both in the U.S. and international markets, were paying incentive fees, and it hasn't changed much since then. So probably low double digits for North America and International is 60% or 70%.

Vasant Prabhu

I think the important thing is in International, that number doesn't change very much because of a very few thresholds. And therefore, it's always in the 70-plus percent range. It's North America that will move around, and we're at the early stages of that.

Frits van Paasschen

And just, Robin, a further qualification on North Africa. The first thing to keep in mind is the number that we cited is the full amount of fees and income we get out of those properties, not the exposure that we might have, if things were to continue to be difficult there. The other thing to bear in mind is that something like 10 out of the 17 hotels are actually in Egypt. So it's unclear yet whether there's any effect on our hotels in places like Libya, Algeria or Morocco. But clearly, we'll have more to say about this as the events unfold, and right now, obviously, it's an extremely difficult situation to predict.

Operator

Your next question is from Smedes Rose from KBW.

Smedes Rose - Keefe, Bruyette, & Woods, Inc.

Just following up on the political situation, I'm wondering if you could break out, at all, your fee exposure in the Middle East, there's a number of the talking heads who were talking about these upheaval moving towards that region now. If it's $10 million to $12 million in North Africa, can you give maybe a comparable number for the Middle East?

Vasant Prabhu

Yes. I think the rough number, all the data is in the Investor Day presentation. And I think even in the fax pack, we do break out our fees by region. So it shows, for example, on Page 8 of the data pack that goes with our press release, for the full year, our fees in the Middle East and Africa, in total, and that includes Africa as well as the Middle East, was 12% of our total fees.

Frits van Paasschen

About 80 hotels, a little bit more for the total region.

Operator

The next question comes from Steve Kent from Goldman Sachs.

Steven Kent - Goldman Sachs Group Inc.

Frits, maybe you could just speak to the balance. Because if I listened to the first half-hour or 40 minutes of your presentation, you spoke a lot about branding, and then Vasant spoke some about CapEx. And I just want to understand the balance, as a CEO, of how you're trying to keep those things, which obviously cost money versus keeping expenses tight. I know you mentioned the headcount, but do you have just as many people or people within the organization as keenly focused on keeping those expenses tight in all those initiatives as much as you have on the brand side.

Frits van Paasschen

Well, I think, Steve, as you look at our headcount and staffing across our corporate and overhead functions over the last couple of years, it's pretty clear that we've been able to keep the discipline where we are. In terms of branding, there's a considerable amount of scale that goes to having a lodging brand. In other words, even as we add more hotels, while we need to add some local resources to support those brands specifically in markets, a lot of those costs are either fixed or they're part of the break-even fund pools that we have to invest in, in building brands on behalf of owners. And so, I don't think that the branding focus that we have is as much at odds with our P&L as it might seem. And what I wanted to emphasize, in my words, that we have been able to combine the focus on creativity and innovation with the discipline on the same side. And what you see in some creative and brand-driven organizations is a lack of balance in that way. And I think that right now, given where we are in terms of our corporate culture and the alignment of our senior teams around the world, we're in a very good place, I think, to take advantage of that scale. When it comes to CapEx, as you know, we currently, today, only own about 5% of our total base. And so the work that we've done has been largely focused on making sure that our owners are in a position that they're investing behind our brands in meaningful ways. And one of the things that we've talked about for some time is the fact that over 60% of our hotels today continue to be hotels that were either opened or significantly renovated in the last three years. So we have a very strong base of hotels. We have the highest percentage of hotels for the brand Sheraton that are on-brand and consistent with our standards than we've ever had. And I think that's born out by some of the other results and some of the other all-time highs that I was talking about during my discussion of branding

Operator

Your next question comes from Harry Curtis from Nomura.

Harry Curtis - Nomura Securities Co. Ltd.

Frits, a quick follow-up on a comment you made about the cut-rate channels. Can you give us a sense of what the mix is today, what a more normalized mix is likely to be? And to the extent that you can parse your REVPAR guidance for 2011, how many basis points of REVPAR growth really comes from that element of the mix shift?

Frits van Paasschen

No, it's not a huge number. I used that more as an example, Harry, than something that, I think, by itself will be a driver. So if you look at our total online travel agent revenue, our bookings that come from those channels, it's in the 5% range. And so even if that were to go down by what would be a significant percentage of that 5%, the impact on REVPAR just from that wouldn't be huge. But the point is, as you look at things like whether you have airline crews in W hotels, what kind of business we take in general from different channels, that overall mix, I think, does add up to being a meaningful amount. In fact, as you look at 2010, there weren't huge rate increases. Most of the increase on the rate side of REVPAR growth in 2010, and Jay could split this out maybe for you later, would have been driven by more by mix than it would have been by absolute rate increase. So again, that comment was more driven to point to an example of how mix can change rate rather than itself being the key driver of that.

Operator

Your next question comes from Josh Attie from Citi.

Joshua Attie - Citigroup Inc

You mentioned that one of the items weighing on Hotel margins was that revenue growth was lagging REVPAR. Based on the Group booking space and the outlook for related FNV [ph] in Catering revenue, when do you that gap between revenue growth and REVPAR starts to narrow?

Vasant Prabhu

I think you'll start to see it narrow, clearly. There's a cycle about this, too, as you know. It should start the narrow as the Group business, as a percentage of our mix, continues to grow. So you should start to see it narrow, but it won't go away in 2011. I think you're looking at a couple of years before the two converge. It wouldn't be very different than what we saw in the '04 to '07 timeframe.

Operator

Your next question comes from Chris Woronka from Deutsche Bank.

Chris Woronka - Deutsche Bank AG

I wanted to ask quickly about China. As you kind of expand there and move out little bit out to the West in some of the second, I guess what we call the second-tier markets, are those hotels still kind of paying incentive fees out of the box? And do they ramp up? Do they still ramp up pretty quickly? And just kind of your general overview on what's going on in China with some of the concerns, does it impact your plans at all?

Frits van Paasschen

Chris, what concerns? Just to be more clear before answering your question. I'm not sure if you can get back in, Chris. I'm going to assume your concerns here for a sec. First of all, I think it's interesting and important to remember that our incentive fees in countries like China don't have a preferred return basis, as Vasant was referring to earlier. So we would get to incentive fees early in the process. As you look at second-tier markets, it's also hard to make generalizations. There are some markets where, because we're the first five-star brand with a global connection in that market, those hotels do quite well and achieve great rates. There are other markets that are continuing to build where that will come in over time. But we continue to be very impressed with the resiliency of the Chinese market. Vasant mentioned to you the ability for demand to absorb occupancy post-Shanghai World Expo. The same thing was true after the Olympics in 2008. And so, the pace of development in China continues to be very strong. We continue to see opportunities to sign new projects. And as you could see, the REVPAR numbers for 2010 is certainly borne that out.

Operator

Your next question comes from Will Marks from JMP Securities.

William Marks - JMP Securities LLC

You mentioned a lot on Bal Harbour but can you give just overall thoughts on the timeshare or fractional industry, in general, what kind of trends you're seeing?

Frits van Paasschen

I don't know if I would give comments on the industry, in general. What I can tell you is, as we've mentioned in the call or in the script earlier, timeshare is starting to build. We believe that a timeshare purchase is largely a big-ticket discretionary item and, therefore, very much a function of an individual's confidence about their own situation. As the world improves, that certainly gets better. Delinquencies are going down, which is a trend we've seen in common with the improving balance sheets, at least of people with higher net worth across the U.S. So this is a business that is in a rebound. I wouldn't say it's a rapid rebound, but it's certainly one that's held its pace, which is good for us, because that continues to give us opportunities to monetize and reduce our exposure to vacation ownership and then take advantage of the fact that we have a strong team and strong brands that will enable us to be successful in doing that.

Jason Koval

Thanks, Fritz. That wraps up our fourth quarter earnings call, but please feel free to contact us if you have any additional questions. And we appreciate your time and your interest in Starwood Hotels & Resorts. Goodbye.

Operator

Ladies and gentlemen, this does conclude the Starwood Hotels & Resorts Fourth Quarter 2010 Earnings Conference Call. Thank you for participating. You may now disconnect.

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