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

Q4 2006 Earnings Call

February 1, 2007 10:30 am ET

Executives

Jason Koval - VP of IR

Steve Heyer - CEO

Vasant Prabhu - CFO

Analysts

David Anders - Merrill Lynch

Will Truelove - UBS

Harry Curtis - JPMorgan

J. Cogan - Banc of America Securities

David Katz - CIBC World Markets

Joseph Greff - Bear Stearns

Steven Kent - Goldman Sachs

Bill Crow - Raymond James

Celeste Brown - Morgan Stanley

Jeffrey Randall - A. G. Edwards

David Katz - CIBC World Markets

Jeffrey Randall - A. G. Edwards

Michael Millman - Soleil Securities

Presentation

Operator

Good day, everyone and welcome to the Starwood Hotels & Resorts Fourth Quarter 2006 Results Conference Call. As a reminder this call is being recorded.

Now at this time for opening remarks and introductions, I would like to turn the conference over the Vice President of Investor Relations, Mr. Jason Koval. Please go ahead, sir.

Jason Koval

Thank you, Lisa, and good morning everyone. I'd like to thank all of you for joining us for Starwood's fourth quarter 2006 earnings call. Joining me today, I have our CEO, Steve Heyer and our CFO, Vasant Prabhu.

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

With that, I would like to turn the call over to Steve for his comments. Steve?

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Steve Heyer

Thanks, Jay. Hello, everybody and thanks for joining us today. Top-line, I am really very pleased with what Starwood Hotels has accomplished in 2006 and delighted about how strongly we are positioned for 2007 and beyond. So, before I dig in to the details behind the quarter, I am going to talk for a little while about the year as a whole, because 2006 was an excellent year by really every measure.

We delivered worldwide system REVPAR growth of 9.9%. We signed our 156 hotel contracts representing almost 37,000 rooms. We drove exceptional results across our owned portfolio with worldwide branded REVPAR up 10.5% for the full year and worldwide branded margins increasing 220 basis points. Our timeshare business grew originated sales 19.2% with industry leading margins of almost 30%. We successfully acquired an integrated Le Meridien, and rolled out two new brands to the development community, aloft and Element. While each of these was a bit of drag on earnings in 2006 due to development and marketing costs, each of these brands adds great depth and value to the Starwood portfolio further bolstering our growth potential.

We completed the sale of 50 hotels and generated proceeds of $4.7 billion while retaining valuable long-term management contracts with high quality owners and important partners for future footprint expansion. And we feel really good about the fact that we returned $4.3 billion to shareholders including $2.8 billion related to the Host transaction with minimal facts leakage, $1.3 billion in share repurchases in the year and $276 million in dividends.

We also achieved another significant milestone in 2006 as it marked the first year where our fee business was the largest contributor to our bottom line. We are well on our way towards the successful execution of our new business model, as we have shifted our centre of gravity from our hotel ownership business to our high-growth fee business. While owning hotels will continue to be an important leg of Starwood Hotels' strategy, overtime, the growth rates for our fee businesses will outstrip our owned hotel EBIDTA growth rates.

With half of our fees generated from markets outside the US and almost 40% of our owned hotels in international markets, we believe Starwood Hotels is well positioned to enjoy secular growth regardless of where we are in this cycle. And in addition, we feel very confident about our business prospects and we remain on track to deliver on the three-year plan goals that we outlined for 2007 and beyond.

Vasant is going to share much more detail on our guidance with you in a moment. But first, let's look at some of the highlights from that quarter.

We generated EBIDTA of $383 million and EPS of $0.93 beating our guidance. We delivered worldwide System-wide REVPAR growth of 11.4% with broad-based gains across all regions. Our diversified portfolio positions us well to capture both, the strength in the international markets and any gains associated with the depreciating dollar. North America branded REVPAR of 8.6% increased at the high-end of our guidance, and a worldwide REVPAR leapt to 11.7%, demonstrating the quality and the diversification of our assets. Margins increased 153 basis points and 280 basis points respectively.

As for fees, our fees increased 54.8% in the quarter, and after adjusting for the host sales and the longevity in acquisition, we delivered 18.2% organic fee growth.

Contract sales at our vacation ownership business climbed 15%, driven by a mix of price increases and additional unit sold. So, let’s spend a bit of time talking about the pipeline, and our other accomplishments in 2006.

Over the last couple of years, we've refocused our Company’s efforts on strengthening our lead in the upper-upscale and luxury segments by differentiating our brands with both the development community, and importantly with consumers. We've also improved our relationships with developers to help them better understand how our brands can drive higher returns for their projects, and our work is showing dividends.

Our strength as a management and franchise company has been dramatically enhanced, and our operating company infrastructure has been reinvented and it shows in our results.

According to December 2006 Smith Travel data, Starwood Hotels holds the number one position in upper-upscale and luxury development with 38% of the hotels and rooms in the pipeline today. This represents terrific growth on an absolute basis and incredible market share gains.

These hotels represent high value fee streams for the company, and importantly, we are going to continue to improve on the quality of our existing base of hotels at the same time, by only approving hotel deals that strengthen our brands and meet our hurdle of being better than at least half of the hotels in our system today.

Our fee business continues to perform well, but we believe the best is yet to come as our growing pipeline is setting the stage for very strong fee growth in the years to come. We expect to open 80 hotels this year, right where our three year plan suggests we should be. 2006 was also significant because we rolled out two new brands, aloft and Element. These brands are the result of an ongoing collaborative effort between our brand teams and the development community to improve upon our competitor's offerings in the select, serve and extended-stay segments. This is a tremendous opportunity for Starwood Hotels.

Our work with developers has really taken-off in these areas, and its allowed us to successfully design the equivalent of what I think would be a Gen 3 product in Gen 1, and its going to create ownership demand in buying because of the common vision shared by Starwood Hotels and our network of developer partners. While we are only in the first year of the launch, we already have 23 sign deals for aloft and several more for Element. We are also well on our way to meet our longer term goal, because we have over 50 deals in the pipeline between the two brands. Our work with the worldwide development communities also allowed us to tweak these prototypes to better fit local markets and we recently signed the first of many alofts to come in China.

Our goal for 2006 was to sign 150 new contracts, and we exceeded that goal with the year end total of 156 executed deals, representing almost 37,000 rooms. Importantly, we now have roughly 400 hotels in the active pipeline and 100,000 rooms and almost half of them are outside the United States.

The development community continues to choose Starwood's brands to maximize their returns. They have confidence in our brand management, our business infrastructure, our design and innovation expertise and our owner orientation, which gives us a sensitivity to the generation of return on invested capital for owners, which makes us unique and a first preference partner. We also opened 59 hotels in 2006, exceeding our goal to 50 openings for the year. And most important, through the strength, quality and rapidly growing Starwood Preferred Guest program, our field marketing efforts in GSI, these hotels opened high.

Longer term our pipeline growth will allow us to better leverage our infrastructure including the real estate team operations in SPG, said another way, our infrastructure today is capable of supporting our aggressive growth goals. Its also worth noting that Sheraton, and Le Meridien, already have well established teams in place throughout the world, which gives Starwood, a terrific platform for international growth, as we can leverage other Starwood, brands such as W, St. Regis, and Westin, into those regions. Developer interest for these brands is very strong. For example, we expect to double our number one position in the Five Star segment in China over the next couple of years.

Our brand teams continue to further strengthen our brand portfolio with powerful brand and experience based initiatives and innovations. Nowhere is this more evident than in the reinvigoration plan for Sheraton that we are currently rolling out. The plan is basically a three pronged approach, which includes a compliance product and portfolio component, a service component and a brand initiative component that will differentiate Sheraton, and continue to help us drive our business in 2007 and beyond.

We presented this reinvigoration plan to most of our major ownership groups and our franchise organization and feedback has been incredibly enthusiastic and the commitment to continue strengthening the brand is very motivating for all of us at Starwood Hotels. We'll be focusing on sharing our plan with all of our owners in the middle of this month with at least four prototype hotels completed by mid year.

Westin was the first global brand in North America to go smoke-free this year and it continues to innovate launching ten global initiatives to support Westin's positioning around personal renewal, including the Heavenly Spa by Westin, the signature White Tea scent and partnership with msn.com and service culture training. 16 hotels were added in 2006 and we anticipate opening 25 more in 2007.

Le Meridien had a terrific first year under our ownership delivering REVPAR growth of over 12% as well. We also conducted several First Night events to leverage new openings including Le Royal Meridien in Shanghai, Le Meridien Lav in Croatia and Le Meridien Ra in Spain. Le Meridien has given our loyal SPG members a huge network of additional hotels around the world where they can stay and redeem points with SPG generating a 200% increase in revenue and stays versus the old moments loyalty program Le Meridien had before they joined our system.

Le Meridien will be sharing its new brand, standards and initiatives with owners this March in Monte Carlo. The progress here has been very exciting and we're terrifically optimistic about the strength and power that this brand has.

W Hotels launched our first Retreat and Spa product in the Maldives and it's been a tremendous success. In its first year of operation, the mixed use W Dallas received several awards including Best Business Hotel by Forbes and top new hotel by MSN. We also announced plans for several new W's including hotels in Thailand, Festival City in Dubai, and Austin, Texas. And we will break ground on the W Hollywood hotel and residences in just a few weeks. W continues its strong pipeline momentum with nine deals added in the quarter.

St. Regis is in a great position to continue to capitalize on a booming luxury market and the pipeline is now over 20 deals. We launched the exclusive Aficionado program designed to provide private access to guest experiences ranging from some wonderful opportunities and experiences like deep sea fishing with Jean George to a private guided tour of the Vatican. St. Regis also re-launched its e-Butler program, which is a digital upgrade to the brand signature Butler Service, which allows guests to be in constant contact with their butlers anywhere anytime through a handheld PDA.

In 2006, Starwood re-launched the Four Points by Sheraton brand. Four Points' new positioning is grounded an uncomplicated comfort and simple pleasures like warm pie, international beer, great coffee and that really resonates universally. Our search for a Chief Beer Officer is one of the most successful PR campaigns in the history of company with over 7,800 applicants for the job from 31 countries and a 100 million impressions and that number keeps growing.

Success of the brand initiatives and our reinvented portfolio of hotels is recognized by a spectacular 30 point jump from eighth to third place in the J.D. Power Guest Satisfaction ranking. I don’t think there has ever been a jump that great.

REVPAR in the past four years has increased over 50% and Four Points' pipeline is strong and strengthening with 50 deals.

Our Timeshare division toped the $1 billion mark in sales this year and we expect our St. Regis, Westin and Sheraton brands to continue driving strong growth in this under penetrated business. Contract sales were up 15% with pricing up 11.2% over the fourth quarter of '05 and a number of units sold also increased by 3.5%. Tour flow and closing rates remained strong, and we are well positioned to continue growing this business with almost 90% of the inventory locked and loaded for the next four years of growth.

2007 looks to be another strong year for lodging in general and we fully expect Starwood Hotels to outperform our peers on key operating metrics, pipeline growth and timeshare growth in profitability. There is a limited supply growth in general.

Under the hood, the picture gets a lot better for us. Supply growth in major Urban and Resorts markets and in the upper upscale luxury segments is even lower than the broader market averages and this is where we have the greatest presence. So, we see little that indicates that this lodging cycle is coming to an end and in fact we believe the rate increases will be some of the best ever not withstanding this past year's amazing performance.

2007 will be the third year of executing on the strategic initiatives I set forth when I joined the company and our strategy has remained consistent throughout -- consistent to the point of being strategically boring and frankly I like that. Our execution has been our focus and to-date it's been super. Even as we have gone about reinventing our business and altering our portfolio.

We fully expect 2007 to be another great year for our company and our team remains focused on these strategic initiatives, service excellence, brand development, pipeline development, vacation ownership growth, real estate development and re-positionings. These initiatives will allow us to continue (inaudible) the competition and create value for our shareholders through our continued financial success.

And with that, I'll turn it over to Vasant, who will give you more details on our financials and our guidance.

Vasant Prabhu

Thank you, Steve, and good morning, everyone. As Steve indicated, we are very pleased with everything we were able to get done in 2006, transforming Starwood while delivering industry-leading financial results each quarter. I will focus on our expectations for 2007, but before I do that I would like to update you on our acquisition of the Le Meridien brand, which we have now owned for one full year.

If you might recall, when we acquired Le Meridien, we expected first year fees of $45 million. We expected $30 million in year one EBITDA. We expected an all-in cost of $310 million to acquire the brand and integrated into our system. So, we expected to be paying seven times fees or ten times EBITDA. So, here's how we have done so far.

First year fees are in at $60 million, helped by stronger than expected REVPAR growth by more Meridiens entering and fewer Meridiens leaving the system since the acquisition and by ForEx rates. So, year one EBITDA has come in at $45 million. The integration is complete, integration costs were as expected. Based on first year result, we paid around five times fees and seven times EBITDA for the brand.

We are of course delighted by Meridien's performance, as our Meridien owners, as Steve said, have seen REVPAR grow 12%, SPG deliver two and a half times more revenue than Meridien's loyalty program, Starwood's global sales offices direct one and a half times more business to Meridien Hotels. And Starwood's websites and call centers delivered substantially more revenue for its integration. So, Starwood system has demonstrated its power to deliver.

While the Meridien acquisition has been a huge financial success, the long-term strategic benefits to Starwood remain significant. We added a stylish European flavored brand that compliments Westin and Sheraton. In Europe, which is recovering rapidly, we added 42 hotels and 38% more rooms to our already large presence. In the booming Middle East Africa region, we have resumed an unassailable lead by doubling our hotel count to 86 hotels and over 22,000 rooms. We added significantly to our presence in key Asian markets such as India and South East Asia.

The US of course is wide open territory with significant owner interest and the successful opening of the Le Meridien, San Francisco with many more to come. Meridien today is our third largest brand in room count and fees with tremendous growth prospects. So, with that, let me turn to our 2007 guidance.

Business momentum remains strong. In the fourth quarter, if you exclude Maui, which was under renovation, Atlanta and Houston which were impacted positively by Katrina, last year, North American owned REVPAR grew almost 11% in line with fourth quarter trends. Similarly, REVPAR at System-wide North American hotels was up almost 10% adjusted for Katrina impacted markets. So, the trend in North America remained unchanged in the fourth quarter.

Outside North America, there was sequential improvement especially in Europe which was further helped by the weakening of the dollar. International System-wide REVPAR was up almost 15% versus 12% in the third quarter.

As we enter 2007, demand indicators remain strong in North America. Corporate rate negotiations are nearly complete with rate increases in the double digits. Group pace is robust, especially with more profitable corporate groups. There is no evidence of any change in transient momentum. The supply picture also remains benign. Outside North America, the sequential strengthening in Europe continues. The Middle East and Asia remains strong. As a result, we expect worldwide REVPAR at company operated hotels, i.e. hotels we own and manage to grow at a healthy 8% to 10% level in 2007.

In October, we gave you an expected EBITDA range of $1.355 billion to $1.375 billion. We expect our 2007 EBITDA to come in the middle of that range at $1.365 billion prior to asset sales. We also indicated in October that we had several hotels on the market. Since then, we have closed on sales of two owned hotels and two joint ventures. With the sale process well under way, we will complete sales of another 14 owned hotels and 8 hotels in joint ventures in the first and second quarters. Adjusting for the sales of these hotels, we expect 2007 EBITDA to be $1.335 billion. The $30 million adjustment will be around $10 million in the first half and $20 million in the second half coming out of owned and joint venture EBITDA. We expect proceeds from the sales of these hotels to be in the range of $475 million to $500 million.

In October, we provided an EPS range of $240 to $246. Although our expected EBITDA is in the middle of the range, we expect EPS to be above the high-end of the range at 250. EPS will not be affected by asset sales, since we expect asset sales to be neutral to EPS. Our EPS guidance is higher than prior expectations for two reasons. As we've completed our tax planning, we now expect our 2007 tax rate to come in at 33%. We also moved aggressively to free-up cash in international jurisdictions in the fourth quarter, and with cash anticipated from asset sales, our interest cost will be lower than prior projections in 2007. Offsetting this is somewhat higher D&A than prior estimates.

A quick review of our expectations by line of business. For the full year, we expect North American owned REVPAR to grow by 7% to 9%. As we indicated in October, we have significant renovations planned in 2007. The impact of the renovations will be primarily in the second and third quarters, when the two W's and the [Finition] will be under renovation.

The fourth quarter will be affected by the resumption and completion of renovations at the Westin Maui, like we saw in the fourth quarter of this year. In the first quarter, we expect strong owned REVPAR growth of 8% to 10%. REVPAR growth will be most impacted by renovations in Q2 and Q3's with Q3 being the hardest hit.

On the margin front, we expect margin improvement of 100 to 150 basis points for the year. Margin improvement will also be lower in Q2 and Q3 due to renovation, once again with the greatest impact in Q3. On a full year basis, renovations are hurting REVPAR to the tune of 100 basis points and margins by 50 basis points. And our international owned hotels, we expect REVPAR growth of 8% to 10% and margin improvement of over 150 basis points for the year. This will help by the continuing recovery in Europe, a better year in Mexico, where we were hurt by political disruptions in 2006.

Our only major issue internationally is the impact of the Guam and Fiji at our two owned hotels there. Travel to Fiji has been significantly disrupted and the timing of the recovery is uncertain. To help you better value and model our owned business, we have provided some additional data on our owned hotels in the data pack. Although, we owned 85 hotels at the end of 2006, 40 hotels account for 85% of our owned EBITDA. We've provided a list of these top 40 hotels, their locations and room counts on page 15 of the data pack.

On page 16, we have provided data on our top 10 US and top 10 international markets, so you can have a better sense of how market and currency shifts might affect our owned hotel portfolio. As we've said before, we remain a significant owner of high value, high growth hotels. Our owned portfolio is broadly diversified across major US markets and across the globe, with 40% of our profits derived from outside the US. We hope the data we have provided will help you better value and model our owned hotel business. We will provide it a couple of time a year, to the extent that there are significant changes.

Moving on to our Management & Franchise business. We had a great year in 2006 but for both signings and openings, as Steve said, we signed 156 contracts for new hotels to enter our system and open 59 hotels. Our pipeline now includes over 400 hotels comprising 100,000 rooms. We are punching well above our fair share, as you can see in the Smith Travel pipeline data for upper-upscale and luxury hotels. And our new select sale brands aloft and Element are off to a great start.

As such, we expect another strong year of fee growth. Management & franchise fees will be up 17% to 19% as reported, growth rates will be highest in the first quarter since the Host transaction closed in April 2007. Adjusted for the Host transaction, full year fee growth will be 13% to 15%, we expect to sign another 200 contracts this year, further growing our pipeline and we will open over 80 hotels.

On page 17 of our data pack, we've provided more detail on the geographic mix of our management and franchise business. This will help you better understand the impact of differential growth rates across the world, and the impact of ForEx shifts on our Fee business. As you can see we drive more than half our management fees from outside the U.S. Our Fee business is global in scope and broadly diversified across the Americas, Europe and Asia.

As Steve indicated, we are the best positioned Hotel Company to capitalize on the global growth opportunity. We hope this data helps you better value and model of fee business.

And our vacation ownership and residential business, we expect a year of strong growth. Originated sales were up double digits in 2006. Tours continue to grow, close rates are steady and pricing has increased. Momentum in the business remains intact across all our key market. We expect this to continue in 2007. As you have seen in the second-half of 2006, projects underway are reaching completion, as such reported earnings benefiting for percentage of completion, this will continue into 2007. We also expect top be largely complete with sales of both the fractional and the residential product at the St. Regis, New York in 2007.

Overall vacation ownership and residential earnings will be up $45 million to $55 million for the year. As we indicated our vacation ownership business will be up even more but our residential business will be down $10 million to $15 million in earnings. These numbers include gains on sales receivables, we expect receivable sales to occur in the fourth quarter as they have for the past couple of years.

With regard to our SG&A, in 2006 this line was significantly impacted by option expensing. We have also invested in building our global development capability as evidenced by the growth of our pipeline. We have added expense due to the addition of the Meridien brand and we have expense associated with the launch of our new brands aloft and Element.

In 2007, we are lapping option expensing in Meridien, while we will continue to invest in global development capability the rate of increase will moderate. We will continue to invest in the launch of aloft and Element. SG&A growth in 2007 will moderate to around 5%. With regard to asset sales, as I indicated earlier, we anticipate $475 million to $500 million in proceeds from sales of owned or joint venture hotels currently underway.

We expect most sales to be completed by the end of the second quarter. Most hotels for sale currently are smaller hotels in secondary markets. Since our investor day in May 2006 when we announced the sale of $500 million to $1 billion dollars in assets over 12 to 18 months, we have closed on around $250 million in 2006 and will complete the program by the first half of 2007 with additional sales of $475 million to $500 million.

On the capital front, with major the renovations we are undertaking, hotel capital spend will be around $225 million in 2007, we'll spend another $75 million on infrastructure and technology projects. We have set aside $350 million for investments in joint ventures, ROI projects and redevelopment projects like Bal Harbour. We will only spend this money on projects that achieve our hurdle rates.

Net investment and SVO inventory in 2007 will be approximately $150 million as SVO's growth continues.

In summary, business momentum remained strong. Corporate rate negotiations are complete with rate increases in the double-digits, both transient and group pace is good, the supply picture in the US remains benign, outside the US growth is accelerating in Europe and remains robust elsewhere and there is no change in trend in our vacation ownership business. We are targeting another year of industry leading results at Starwood.

With that I'll turn it back to Jay.

Jason Koval

Thank you, Vasant. It's now time for the Q&A session. In the interest of time and fairness, please limit yourselves to one question at a time. We can then handle follow-up questions as time permits. Lisa, we're ready for the first question.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from David Anders with Merrill Lynch, please go ahead sir.

David Anders - Merrill Lynch

Great, thank you very much. Hey Vasant, could you comment a little bit on the share repurchase this quarter. Obviously the first three quarters you were very aggressive. If you could just describe perhaps is that a window issue, it wasn’t open long enough or where do we stand on that?

Steve Heyer

This is Steve, I will answer the question. In 2006 as I said, we returned $4.3 billion to shareholders and we brought $1.26 billion in stock. So, we returned more total cash and brought back more stock than anybody in our sector and we're going to continue to be buyers of our stock. As a reminder, we did buy 9 million shares in the third quarter and we've always said that buybacks are going to be programmatic -- sorry, are not going to be programmatic, they are going to be really episodic and we are very comfortable with that. We didn't want to lock ourselves into anything that was programmatic. We may buy more stock in the quarter as we go forward and in one quarter we may buy more and in another quarter we may buy less. On a full year basis we delivered, we think an awful lot of value to our shareholders in the cash that we returned and we're going to continue to return cash to shareholders in 2007.

Jason Koval

Next question please.

Operator

Thank you and the next question come from Will Truelove of UBS, please go ahead.

Will Truelove - UBS

Hey guys. First want to congratulate you on your timeshare disclosure, very good. My question is about timeshare. I know you said trends are looking good there. Can you talk about the tour-to-book ratio? Is there any change in marketing expenses as a percentage of revenues or a slowdown in that tour-to-book ratio?

Steve Heyer

No, it looks just like it has. There has been no meaningful, no material change on any of the metrics that give us a sense of the strength of the market. All of our ratios, all the proportions and all the expenses associated with generating tours and sales are pretty much where they were.

Jason Koval

Next question please.

Operator

Thank you. And the next question comes from Harry Curtis with JPMorgan.

Harry Curtis - JPMorgan

Hi, guys. In the estimate toward the guidance of 250 for 2007, does that assume any significant free cash flow that's used to either reduce debt or buyback stock?

Steve Heyer

Yes. I mean our guidance typically has not implied specific buybacks. We go with the share counts as they are and implicit in there is sort of a buyback, so we didn't know what the option exercises might be. So, that's typically the way we have done it before and so, we are just continuing on the same track.

Jason Koval

Next question please.

Operator

And our next question comes from J. Cogan with Banc of America Securities. Please go ahead.

J. Cogan - Banc of America Securities

Hi. A couple returning of cash to shareholder questions. First, is the lack of buyback activity acing in regards to price sensitivity with the stock at or [higher than 60] and -- or is that just may be something structural? Second, in regards to the dividend, while I know it's a Board decision. But can you may be comment on 5% increase for the year 2007, when I think historically our release of the last few quarters, the comment has been, dividend growth would be equal to the company's earnings growth rate plus or minus some other consideration such [as seemed] a little bit less than what we had anticipated?

Steve Heyer

I'll take your first question and I think I will answer the question that was behind your question and then I will let Vasant handle the dividend point. We are not looking at any big acquisitions, if that's what you meant by structural. Our acquisition criteria are absolutely unchanged from what we told you on our Investor Day. We are going to buyback certain hotel opportunities, where we don't think an owner can make the investments that we need, made in a particular box or a particular brand. We will buy complimentary brands like we did with Meridien, if we can get them at a good price. We will buy real estate if we can do something with it, like convert it to one of our stronger brands than whatever brand might be on that hotel or if we can redevelop it for timeshare or fractional. But again it has to meet our hotel rates. We may take a minority stake in a portfolio of hotels if -- and owners willing to convert to our brands. But we area not going to buy real estate like the hotels that we sold or anything else that doesn't meet the criteria I just outlined. So Vasant, you want to speak to the dividend.

Vasant Prabhu

Yes. On the dividend question. As we indicated last year, we maintained our healthy dividend. Our dividend is the highest in our sector, both in dollar terms as well as in yield terms. We indicated, we would increase it and we've indicated that that will in fact be the case in '07. Our payout ratios in '07 remain healthy even at the 5% increase. Just as a clarification, our Board makes the official decision on what the dividend is actually going to be for '07 at the end of the year as it did this year. So, all we have indicated so far is directional, but the final decision on dividends is made by the Board typically in December for a January distribution of dividends.

Steve Heyer

Yes. But our Board has been very supportive for management and it's a great process. We think together. We make a recommendation. It's based on our best estimate of what we can do and what gives us the financial flexibility we want to retain and we have a very robust discussion and so far the Board has supported our recommendations.

Jason Koval

Next question please.

Operator

And our next question comes from David Katz with CIBC World Markets.

David Katz - CIBC World Markets

Hi, good morning. Congrats on a good quarter. I guess really just to follow up that issue. Perhaps I'm looking for a definition of what a big acquisition is? Because I guess looking at your capital structure, your leverage is fairly low. There's more cash coming in from asset sales and just trying to think about sort of uses of capital going forward and without a big acquisition, it might suggest that something has got to give in there somewhere. So, if you could help me think about that, I'd appreciate it.

Steve Heyer

I don't really know how to answer that question except to say what I said. We are not looking to buy operating companies. We are looking to buy brands or we are looking to buy hotels or clusters of hotels that can be converted, that pass our screens. If you look at the world of available acquisitions, that fall inside that definition, there isn't anything huge. There isn't anything even big. And if we rolled up to three, four, five, six of them that aren't for sale today, that would be -- that would pass our screens, that aggregate isn't that big.

Jason Koval

Next question please.

Operator

And our next question comes from Joseph Greff with Bear Stearns.

Joseph Greff - Bear Stearns

Good morning, guys. Most of my questions have been asked. I want to make sure I'm doing on the math on this right. Beside the hotels, say proceeds of 487, if I am right in the middle. The full annualized EBITDA, that's 30 million. Is that the right way of looking at it, because it's a pretty healthy multiple?

Steve Heyer

No. I think you are close. We are assuming they get sold in the first and second half. So, if you assume -- sort of they are all done by the first half. We have got $20 million EBITDA impact in the second half. So, if you analyze that just double it, you are getting, sort of roughly where it is, it’s about --

Joseph Greff - Bear Stearns

It's still a very healthy multiple.

Vasant Prabhu

It is.

Steve Heyer

It is and it’s a function of the mix, we have some hotels that are for sale, that are in fact wonderful hotels but by virtue of their seasonality don’t necessarily generate the kind of EBITDA that you would associate with the multiple.

Joseph Greff - Bear Stearns

Great, thanks guys.

Jason Koval

Next question please.

Operator

Thank you. And our next question comes from Steven Kent with Goldman Sachs. Please go ahead.

Steven Kent - Goldman Sachs

We are good. We've got our questions answered.

Jason Koval

Next question please.

Operator

(Operator Instructions). Our next question comes from Bill Crow with Raymond James. Please go ahead sir.

Bill Crow - Raymond James

Good morning guys. Two quick topics, first of all, could you breakout the 100,000 pipeline between managed and franchised opportunities, and where do you see incentive management fees go in over the next few years? And then second, if you could just talk about a couple of hot button real estate opportunities for you may be the Sheraton Manhattan, anything else that you see as a real driving the opportunity for value creation?

Vasant Prabhu

I think Steve will answer the question on Manhattan. I will just answer the question you had on the mix of our pipeline. Roughly speaking, its sort of little over 50%-55% managed 40%-45% franchised, that sort of where the pipeline is today. As Steve said, half of it almost is outside the US, you should assume that half that’s outside the US, is almost entirely managed with very little franchised, the piece that in the US, tends to skew more towards franchising than management. It’s a good mix between luxury hotels upper-upscale and select-serve, we have -- if you look at Smith Travel, our pipeline in luxury is extraordinarily strong, which will make us the largest operator of luxury hotels within the next 3 years in the U.S. And then on Manhattan Steve you take that one.

Steve Heyer

Yes, we're in discussion with a few world-class developers about partnering with us, on that hotel, and we expect that in the next six months, we'll be announcing a dramatic operation to that hotel. We know it's a drag-on the brand and we know we need to, that the real estate is very, very valuable and we're really excited about interest level that's been expressed by some of the world's best developers. So, we're pursuing this in a thoughtful way and we're following a process that gives these developers an opportunity to share their vision and frankly give us the opportunity to make sure that we maximize the value associated with the property that we think is truly unique not just for hotel use, but for retail use and for office base and a variety of other mixed use opportunities. And so, when we look across at the models that we've been building, frankly the fact that we've done nothing for the last year or two has been great because the value of that property continues to accelerate, but we're not going to continue to do nothing. We're going to act on this and make a decision in relatively short order.

Jason Koval

Next question please.

Operator

(Operator Instructions). Our next question comes from Celeste Brown with Morgan Stanley.

Celeste Brown - Morgan Stanley

Hi, guys, good morning. As you've discussed in your press release and then on the call you made the decision to go ahead with Bal Harbour residential project. Can you discuss how that relates to your three year outlook for timeshares, relating it back to the information you gave in May?

Vasant Prabhu

Yes, in May as you might recall, we gave you guidance on our timeshare business, vacation ownership, and fractional -- timeshare and fractional and told you that residential was not in there, while we made our decision on Bal Harbour. What I would say about Bal Harbour right now as you know things are still looking good, the sales are steady, we're finalizing some final details on cost and other partnership items. Everything still looks good we're assuming that this is going to move ahead, although a final decision will be made soon. And at this point it has no revenue impact on '07, it has an expense impact in '07, and we'll keep you updated on what the impact on '08 and '09 will be on the Bal Harbour project, once the final decision is made to proceed.

Steve Heyer

Yes, the only thing I would add to that is the more work we've done on it and the more feedback we've gotten from the market. There is universal belief that this is probably the most fabulous location in South Florida, and the demand for it really it lives in its own competitive set. And we believe that it could be a fantastic St. Regis destination.

Jason Koval

Next question please.

Operator

And your next question comes from Jeff Randall with A. G. Edwards.

Jeffrey Randall - A. G. Edwards

I wondered if you would just comment on the amount and timing of any note sale gains assumed in the outlook for '07? And then secondly, it looks like the Bliss revenues although it's not a big number those are flat year-over-year. What's going on there if you can comment on that as well? Thanks.

Vasant Prabhu

No in that line there are things moving around Bliss actually had a nice year of growth, Bliss doubled more than doubled its profit this year. We didn’t get into the details, but this is another one of our acquisitions that has done extremely well, while strengthening our core business. Another one of those acquisitions where the value today of Bliss is many-many times more than what we paid for it, so Bliss is doing just fine.

Steve Heyer

We focused on the profitability of Bliss this past year and not on just driving growth and buying distribution. And when you do that, some of your units' growth comes down but we basically created a going forward model where we are getting paid the way we should be paid and we are not buying distribution, but the demands for the brand and the strength of the brand is creating additional distribution. So, we will see a much better balance of growth and profit as a result than we had a year ago.

Jason Koval

Next question please.

Operator

And we have a question again from David Katz with CIBC World Markets.

David Katz - CIBC World Markets

Hi, thanks. At the analyst conference last week, we heard from some of the industry experts that put out some outlook information for this year and for next and we saw some fairly modest REVPAR growth in outlooks. And then we have heard from one of your competitors so far and you today, something that’s seemingly far more positive than what they are saying and it suggests that, either there is a population out there that’s going to do a heck of a lot worse than you guys or some of those industry forecasts were a little bit too conservative. Can you shed some light on what your's expectation or what you are seeing out there? Are you taking share from others or I assume you are familiar with some of those forecasts that are out from last week?

Vasant Prabhu

Yes, I mean at this stage of the game when we provide owned REVPAR guidance or system wide guidance, it’s a bottom up number. So, it's reflective of what's in the budgets. These budgets have been done by our owned hotels and in partnership with owners at our managed hotels. So, the way I would answer your question is, yes we are gaining share. This reflects the fact that our hotels tends to skew towards upper upscale and luxury category. The second thing is, remember that, in our business half our rooms in the upper upscale and luxury category are outside the US. So, half of our fees are outside the US, 40% of our owned EBITDA is outside the US. Europe is sequentially stronger in many respects than the US. The Middle East and Africa have been strong. Asia has continued to be very robust. So you have to remember that, so you can just focus on how the US is doing. And then looking at the US itself, as we indicated, we’ve done our corporate rate negotiations. The rate increases have come in the double-digits. So, when you look at all the data points we are looking at, when you look at where the hotels are ending up in their own budgeting. We feel good about what we are projecting for our REVPAR and margin improvement based on everything we know at this point.

Steve Heyer

Our operators are very focused and they are very disciplined and frankly if they have a bias it's towards conservatism, and we’ve made it very clear to them that we want to be transparent with you and we have made it very clear with you I hope that we intend to keep our promises. I think we’ve done so and we are going to keep doing what we tell you we're going to do and that’s the kind of business planning cycle process that we’ve implemented. So, our crystal ball is maybe a little bit clear or cleaner than some others. There are certainly someone unknowable's, but based on the things that we see and the trends that we see, and frankly the upbeat projections that we gave gotten bottom up and the critic that we have done top down, we feel good.

Jason Koval

Next question please.

Operator

Our next question comes from J. Cogan with Banc of America Securities, please go ahead.

J. Cogan - Banc of America Securities

Yes, hi couple of quick follow ups. One Vasant, can you tell us what is baked in as it relates to your owned hotel margin forecast, as it relates to some cost like energy which could be a bit volatile. Just kind of curious what you are assuming for the year 2007. And then back to the real estate questions, can you give us an update on what's happening with the W Las Vegas and is there -- and another also maybe some other real estate opportunities, the opportunity to monetize some of the land you owned or some of the conversions et cetera that we should be keeping an eye on beyond lets say Bal Harbour and the Sheraton, New York?

Vasant Prabhu

Yes, your first question is sort of energy. Energy is a little uncertain in terms it clearly was helpful in the fourth quarter. And overall we would say the -- we are expecting some modest increases the impact is what we are hoping. At least the way our numbers all rollup is that the energy moderation will help us offset the massive increase we have had in property insurance. It is sort of how it works in the fourth quarter and we are assuming that's how it proceeds into next year.

Steve Heyer

As far as the work that we are doing around, our land deals and hotel deals we might preference the hold off on being specific. We have quite a few conversations ongoing and I would much rather announce closed deals then speculate about what might happen. But we are actively pushing and working against the couple of examples you gave and there are in fact some land opportunities that we are currently working to unlock and as soon as we have something definitive, we would be happy to share it.

Jason Koval

Next question please.

Operator

And we have a follow of question from Jeffrey Randall with A. G. Edwards

Jeffrey Randall - A. G. Edwards

Hey, guys, two quick follow ups. If you could comment on the W international REVPAR decline in the quarter and then secondly, just comment on the amount and timing of any noted sale gains that are assumed in the outlook for '07?

Vasant Prabhu

Yes. On the W, the international W is really just doing that showoff there at this point. There are two Ws that are opened, one in Seoul, Korea, one in Mexico. It was driven by the Seoul hotel as the unique situation. So, there's really nothing much to report there. The W pipeline next year will include more international hotels like the W Maldives. The Ws, by the way, are doing extraordinarily well outside the US.

Steve Heyer

The demand for W in Europe is stronger than battery acid and frankly, we are going to have to add a couple more people to just respond to requests.

Vasant Prabhu

And in terms receivable sales, we are expecting something in the $10 million to $15 million range, which is sort of a little lower than it was this year.

Jason Koval

Next question please.

Operator

Okay. And our last question remaining in queue comes from Michael Millman with Soleil Securities.

Michael Millman - Soleil Securities

Thank you, the two quick questions. Could you tell us on timeshare, what percent of your sales are made to existing owners and what the trends have been? And also on the REVPAR question, what's the impact of exchange on your projections?

Steve Heyer

On the timeshare side, roughly about 20% to 25% comes from people who are already there or staying. Actually, they don't have to be existing owners as much for staying at our resorts. It's an important source of people taking tours for us. On your second question which was, what was the second question?

Vasant Prabhu

On REVPAR and FX.

Steve Heyer

The ForEx impact on -- what we typically do is, we sort of look at where ForEx has been in the range in recent times and then we use that. We don't try to project ForEx trends going forward, and that's implied. What you should know is about how far, we've provided you data in our data pack that helps you understand what the impact is of the Euro, Asian currencies and Latin American currencies as to both our owned hotels and our fee business. So, that will give you a sense of how much we're dependant on the Euro, which has been the most -- which has been the strongest currency relative to the Dollar versus the Asian or Latin American currencies, which have been in different places.

Jason Koval

Well, that wraps up our fourth quarter call. I want to thank all of you for joining us today. Feel free to contact me directly, if you have any other questions or follow-up. And we appreciate your time and interest in Starwood. Goodbye.

Operator

And that concludes today's teleconference. Thank you for your participation. You may now disconnect.

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Source: Starwood Hotels & Resorts Q4 2006 Earnings Call Transcript
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